There is a sound logic to preferring emerging markets
investors have embraced the equities of the emerging markets in the last five
years, adding to their investments as they have liquidated their holdings of
companies in developed economies. Up from 6% in 2008, emerging markets equities
now make up about 10% of institutions’ overall equity holdings, according to
eVestment Alliance data.
There is a sound
logic to preferring the emerging markets. Economic growth is forecast to be far
stronger in these markets than in the U.S. and Europe. And even though past
growth has been led by exports to the developed world, the expansion is
expected to accrue to companies that serve the local economies, which are
growing in both numbers and wealth. In a world of slow growth, emerging markets
equities could be the best game in town.
“The secular story
for owning emerging markets equities is based on four factors—population
growth, rising per capita incomes, urbanization and growth in GDP [gross
domestic product],” observes Zainul Ali, head of investment manager research
for the Americas at consultant Towers Watson, in the firm’s Toronto office.
“Population growth and urbanization of countries that have been rural drive the
demand for all sorts of things,” he explains, “and when that is matched with
rising incomes, you get growing local demand that benefits the local
According to the
International Monetary Fund (IMF), in its January World Economic Outlook
Update, the emerging market and developing economies are slated to grow at
5.5% in 2013 and 5.9% in 2014.
The “domestic growth” thesis is crucial to the investment case for emerging markets equities. Growth in the developed economies—in the past, the emerging markets’ best customers—will not likely support an expansion like the export-driven boom of the last two decades. Economic gains in the U.S. are expected to be just 2% in 2013 and 3% in 2014, while Europe, after shrinking in 2012 and 2013, will return to the black only in 2014, with projected growth of just 1%.